Testing the sustainability of the Croatian public debt with dynamic models

Petar Sopek, Privredna banka Zagreb, Zagreb, Croatia

AbstractAlmost all macroeconomic indicators change upon shocks influenced by the global financial crisis that has also spilled over to the public sector, seriously threatening fiscal sustainability. The aim of this paper is to estimate public debt sustainability in the crisis and post-crisis period from 2011 to 2015. For estimation of public debt movements, decomposition of basic flows that lead to its change will be considered, and each one will be separately modeled dynamically. It is shown that in the period up to 2015 the share of public debt in GDP in optimistic scenarios does not exceed the margin of 60%, prescribed by the Maastricht criteria. In baseline scenarios we get two-sided results, so in the first model public debt slightly exceeds the limit of 60% with a share of 62.6% of GDP in 2015, while in all other baseline scenarios public debt stays at the level of 45.8, or 52.5% of GDP. Therefore, we conclude that in the medium-term period up to 2015 there is a real danger of public debt increasing over its acceptable limit and the major threats lie in contingent liabilities and exchange rate shocks, while minor vulnerability can be observed in case of real GDP growth and nominal interest rate shocks.